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Hotel Stocks Challenged by "Trump Slump," Increased Supply

It is reasonable to take a favorable view of the lodging industry’s supply-demand fundamentals given the improving U.S. and global economic outlook. Then again, the so-called “Trump Slump” in travel -- the anticipated decline in foreign travelers to the U.S. due to Trump administration’s policies -- does not bode well for the U.S. economy or the hotel industry.

Additionally, increased supply coupled with macroeconomic concerns in several emerging economies could keep hoteliers’ growth under check. This makes it important to take a closer look at some of the dampeners before investing in the hotel industry.

Below we discuss some of the headwinds that hotel stocks may face in the near and the long term:

Trump’s Policies Hover Over Hoteliers: President Donald Trump’s efforts to impose a travel ban barring inbound travelers from some predominantly Muslim countries along with the recent ban on a broad range of electronic devices in the cabins of U.S.-bound aircraft from certain countries and talks of expanding the same have cast a pall on future travel demand to and from the U.S. The President has also talked about building a wall along the U.S. southern border to curb Mexican immigrants entering the country illegally.

Trump’s travel ban orders have been stymied by federal judges. However, his stringent policies on immigration and tourist visas to deter foreigners from the U.S. appear to have made international visitors rethink their vacation in the U.S.

Notably, since Trump took office, there have been clear signs and data suggesting that the number of people willing to travel to the U.S. has already reduced dramatically, thanks to his plans. In fact, there’s been a continued slow-down in U.S.-bound air travel bookings ever since. Also, online searches by prospective travelers to the U.S. have also been witnessing a sharp decline.

In fact, as per Tourism Economics, the drop-off in tourism is anticipated to result in 4.3 million lesser visitors this year. This adds up to a staggering loss of $7.4 billion in revenues for the U.S. Meanwhile, another 6.3 million visitors and $10.8 billion that they would have spent is estimated to be lost in 2018, due to Trump rhetoric and policies.

Thus, as tourists plan to steer clear of Donald Trump’s America, the U.S. travel industry is bearing the brunt of his unpopular policies. As the U.S. has become by some degree, a less desirable place to visit, causing billions in lost revenue,it is sure to be detrimental to hoteliers’ businesses and the overall industry.

Lingering Uncertainty in Certain International Markets: Despite immense growth potential, hoteliers are still apprehensive of several macroeconomic issues like the social/political impact of ‘’Brexit’’ and decelerating growth in certain parts of Asia. Though Trump’s stringent policies might make travelers opt for Europe and Asia, instead of the U.S., various concerns in these regions raise eyebrows.

Notably, a sluggish economy and oversupply in Brazil are weighing on demand in the Latin American region and has checked overall sales. In fact, a weak Latin American economy, aggravated by political turmoil led to softer tourism numbers in 2015 and 2016. This is likely to continue in 2017. Continued uncertainty in Africa and macroeconomic factors in Venezuela are likely to restrict hoteliers’ revenues.

In Europe, economic/political conditions are expected to be challenging after U.K.’s exit from the 28-member economic bloc. Business in Europe is as it is clouded by economic uncertainties in the Northern region and deflation in the Eurozone.

Recent terror assaults in key European cities like London, Paris, Zurich and Brussels have also affected tourism. Challenging market dynamics in France is a potent headwind. Additionally, concerns of further terror attacks and violence against foreign tourists are increasingly hurting trade in many African countries such as Kenya and Nigeria.

If these aren’t enough, the slowing down of the Chinese economy — which might continue to hurt discretionary spending and travel — and concerns over Japan owing to a weaker yen and tax increases are adding to hoteliers’ woes.

Meanwhile, in the Middle East, political unrest, lower government spending, new hotel supply and a tough oil market continue to hurt tourism and RevPAR trends. Any respite from these ills in the region is not expected in the near-term.

Most of the leading hoteliers’ have considerable presence in the above-mentioned markets and are thus vulnerable to the economic conditions in these regions as it might limit their business growth.

Slowing RevPar Trends: Most of the hoteliers in the U.S. have been witnessing slowing revenue per available room (RevPAR) trends of late because of continued muted international visitation. Moreover, continued increase in supply of hotels in the domestic market is limiting room rents, thereby hurting RevPAR.

Moreover, the majority of leading hoteliers expect soft demand in the oil producing regions – mainly parts of Texas, Houston, Louisiana, Houston, Oklahoma City and West Virginia – to continue taking a toll on RevPAR.

Fluctuation in Exchange Rates: Most of the major hoteliers like Marriott, Hyatt Hotels Corporation (H - Free Report) and Wyndham Worldwide Corporation (WYN - Free Report) generate a substantial portion of their revenues from customers outside the U.S. and are therefore highly vulnerable to fluctuations in exchange rates. Thus, continued volatility in exchange rates would continue to hurt their results as it has been doing so over the past few quarters.

Meanwhile, as the U.S. dollar continues to show strength against various other currencies, negative currency translation is a major concern for these companies. Also, a strong dollar means that travel to the U.S. is becoming more expensive for visitors from other countries and they might look for alternative destinations. This is likely to thwart travel demand and length of stays.

Both these factors may possibly be detrimental to the hotel industry. In fact, Marriott and Hyatt has been witnessing fewer international guests at its U.S. hotels, given a stronger dollar. Meanwhile, Marriott and Wyndham are also bearing the brunt of the Venezuelan currency devaluation.

Operating Margins Under Pressure: Operating margins for hoteliers are yet to reach the industry peak of 2007 in the U.S. given the spike in costs. Hoteliers are looking to differentiate themselves and keep pace with changing consumer tastes through investments in technology, quick customer service and real-time marketing. These are denting margins even further. Additionally, most hoteliers plan to gain competitive advantage and differentiate their brands through renovation. This will however come at the cost of near-term margins.

Meanwhile, as the economy improves and unemployment levels drop, hotel managers are expected to continue struggling to control their largest operating expense – labor costs. Rising salaries, wages and benefits, as well as increased staffing levels have been adding to hoteliers’ labor costs.

Moreover, hoteliers are unable to match the rising cost of operations with the increase in room rates. This is lowering their ability to achieve levels of profit growth observed in the last four to five years.

Additionally, online booking sites like Expedia Inc. (EXPE - Free Report) and The Priceline Group’s (PCLN - Free Report) Booking.com are limiting the pricing power of these hotels, which are contracting their margins. Higher commission rates charged on hotels are also hurting margins. Meanwhile, with lower overhead costs and less strict regulations than hotel companies, home sharing companies like Airbnb, Inc. are competing head-to-head with traditional players in certain segments of the market and even seizing share from them.

Stocks to Avoid

A couple of players in the space that induce our cautious-to-bearish outlook are Marriott and Peak Resorts, Inc. (SKIS - Free Report) . Both the stocks carry a Zacks Rank #4 (Sell).

Negative sentiments related to traveling to and from the U.S. thanks to Trump along with decline in international inbound travel given a strengthening U.S. dollar are acting as the major spoilers for the U.S. hotel industry.

Additionally, various geopolitical and economic woes, oversupply, and higher costs are wreaking havoc on the hotel industry. Nevertheless, it remains to be seen whether improving economic indicators and initiatives undertaken by hoteliers can offset these negatives.

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